India: Cyclical recovery strengthens – Nomura

Analysts at Nomura explain that India’s GDP growth rose to 7.7% y-o-y in Q1, in line with their expectations but above consensus from a downwardly revised 7% in Q4 – driven by impressive growth in investment and improvement in consumption growth.

Key Quotes

“GVA growth also escalated to 7.6% y-o-y from 6.6% in Q4, primarily driven by agriculture and industry. GVA (ex-agriculture and government services) eased to 7.2% from 7.4%, reflecting softness in some of the private services (trade and financial services). Overall, the data suggest a strong cyclical recovery is currently under way.”

“The V-shaped recovery in non-agriculture growth is in line with our expectations. Our proprietary indicators suggest that the momentum is likely to be sustained through Q2. However, we expect tighter financing conditions, rising oil prices and slower investments in the run-up to elections to slow GDP growth later in the year. Overall, we expect GDP growth to remain strong at 7.8% y-o-y in Q2, before slowing to an average of 7.1% in H2 2018.”

“Current macro data – rising core inflation amid strong domestic demand – are signalling that the output gap is closing rapidly. The Q1 GDP data should give the monetary policy committee enough comfort (on growth) to focus on upside inflation risks. We expect these risks to tilt the Reserve Bank of India’s current “neutral” stance to “withdrawal of accommodation” at the 6 June policy meeting, followed by rate hikes of 25bp each in the meetings on 1 August and 4 October. The June policy decision is a close call; we assign a 40% probability to the MPC voting for a 25bp hike in June itself, followed by another 25bp hike in August.”